Generous
to foreigners
Source: By Ashwani Mahajan: Deccan Herald
If foreign companies purchase shares from FIIs, most of the Indian companies may go into foreign hands.
The Companies Bill, approved by Parliament last week, was in works for the last two decades. After passage of the Bill on August 8 by Rajya Sabha, the path to the new Companies Act, 2013 is now clear. It is said that the new law was framed in view of the requirements arising out of expansion and development of Indian economy. After a Parliamentary Standing Committee submitted its report in August 2010, the government withdrew the earlier bill and a new Companies Bill was drafted incorporating suggestions from various stakeholders. This new Companies Bill 2011 was presented in Parliament during the winter session of 2011. It is notable that according to changed circumstances, Companies Act 1956 was amended number of times. However, for the first time, altogether a new Companies Bill was passed in Parliament.
Apart from other things, there are several new provisions in the newly approved bill, which includes provisions with regard to corporate social responsibility, mandatory rotation of auditors, independent directors, one-man company etc. Of course, when a new law is enacted, it is expected that it will help solve the problems with respect to the existing law. In Indian context, obvious expectation from the new law would be that it would facilitate future development of the country and would also end the worries of the commoners exploited and cheated by the corporate world.
If we take cognizance of the problems of the public from the existing laws, we find that several new companies were created, publishing balance sheets and other books of accounts in a fraudulent manner.
These companies siphoned off more than Rs 16,000 crore from the public and vanished. But Department of Company Affairs, Government of India could not dare take any action against promoters of such companies. However, though there are sufficient provisions against fraudulent balance sheets and books of accounts, such promoters and managers have never been subject to any major conviction except small penalties. Satyam’s Ramalinga Raju is also out on bail after a short spell of 2 years in jail despite a fraud of more than Rs 8,000 crores. Some employees of the auditing company were sent behind the bars.
Generally, we come across the cases of insider trading. Insider trading means trading (buying and selling) of shares by promoters and directors of the company. Insider trading is illegal and causes heavy loss to general investors. Though many cases have been brought to light by enlightened experts, hardly have we found any major conviction in such cases except imposition of fines, that too after a prolonged struggle. Rarely do we find suo motu action by the government, its agencies or regulators.
Lack of will power
In addition to these, many cases of violation of Company Law have been brought to light from time to time. It is not that the existing Indian Company Law lacked provision to deal with these problems. The problem is not in the law as there are enough provisions within the framework of law. The problem is actually that the government lacks the will power to enforce the law.
Though the new law fails to provide any solution for most of the problems of investors, introduction of exit provision seems to be good for small investors. As per this provision, if promoters holding majority shares in the company decide to go for merger with or acquisition of other companies and the minority shareholders are not satisfied with this decision, they will have the right to exit from the company. Such minority shareholders would be compensated and their shares purchased by the promoters at a price as per the formula devised for this purpose. For the first time in independent India’s history, investors will not only have a right to object to a proposal of majority but can also exit the company.
Still, there is a problem in this provision. As per the prevailing law, a promoter cannot hold more than 75 per cent of shares and in case of small investors deciding to exercise exit provision, the holding of a promoter may exceed 75 per cent, which will be in circumvention of the law.
A new provision has been added with regard to acquisition of the companies. As per the existing laws, a foreign company can purchase majority stake in an Indian company but it cannot merge the same with itself. However, this provision is now being amended. A company constituted under a foreign law can acquire an Indian company and merge the same with itself. Similarly, an Indian company can acquire a foreign company and merge the same with itself.
How many Indian companies would be able to acquire foreign companies, only time will tell? However, this provision will definitely clear the roadblocks in the way of acquisition of Indian companies by foreign companies. It is no secret that presently Foreign Institutional Investors (FIIs) own a significant proportion of shares of Indian companies. If foreign companies purchase these shares from FIIs, most of the Indian companies may go into foreign hands. It is in this context that new law seems to be over-generous towards foreign investors.
Though the bill says that rules would be framed to regulate such overseas acquisitions, it is expected that in order to protect national interests, this provision should be done away with.
